As the Bitcoin community struggles to reach a broad consensus over how to expand the blockchain’s block size, thus allowing Bitcoin to scale, a pro-Bitcoin attorney has sounded an important alarm: any hard fork of Bitcoin may be illegal, and furthermore, exposes the developers of the newer code to substantial liability.
“The creators of the new software face potential liability and criminal sanctions unless they register with the Feds,” according to Daniel Friedberg, a principal at the law firm of Riddell Williams PS in Seattle. Furthermore, “the implementation of a ‘hard fork’ would require exchanges to differentiate between bitcoin and ‘Bitcoin Classic’ or ‘Bitcoin XT’ Bitcoin, as its customers would inherently have rights to either one or the other.”
In a recent article on his law firm’s web site, Friedberg points out several legal issues with the looming hard fork – a situation where two incompatible versions of the underlying Bitcoin software coexist until a consensus of miners (transaction processors) switch from the old to new version, thus rendering the old version obsolete.
Bitcoin Developers become Money Services Businesses
The first issue: the potential liability of the software developers working on Bitcoin Classic or Bitcoin XT, two contenders for the new fork of the Bitcoin platform code. “Unlike Satoshi, the mysterious creator of the original Bitcoin software who has remained anonymous and therefore outside the reach of law enforcement, the developers of both Bitcoin Classic and Bitcoin XT are publicly named,” Friedberg explains. As a result, “the creators of Bitcoin Classic or Bitcoin XT would need to register with FinCEN [the US Treasury’s Financial Crimes Enforcement Network] as a Money Service Business (MSB). Failure to register can result in imprisonment of not more than 5 years, as well as civil penalties.”
This regulatory requirement also throws a wrench into the near-anonymity that Bitcoin users currently enjoy. “An MSB is required to maintain effective anti-money laundering (AML) programs, recordkeeping, and reporting of suspicious activities,” Friedberg continues. “In order to do so, the MSB must know who its customers are.”
AML regulations already require Bitcoin exchanges to know the identities of Bitcoin users. However, in the case of the upcoming hard fork, Bitcoin developers must maintain this information as well. “These requirements will require the replacement Bitcoin protocol to maintain the personal identifying information of its users,” Friedberg explains. “The adherence to such requirements will be a large deviation from the current Bitcoin protocol which does not maintain personally identifiable information about its users.”
‘Old’ vs. ‘New’ Bitcoin: Legal Morass
Perhaps the more serious legal issue with the upcoming hard fork results from the fact that it creates two different kinds of Bitcoin, and furthermore, forces owners of the older type to switch to its replacement.
Read the entire article at http://www.forbes.com/sites/jasonbloomberg/2016/02/13/is-the-looming-bitcoin-hard-fork-illegal/.
Disagree with this article? Feel free to comment – but illegal attacks on Forbes or the author’s web sites will be reported to the authorities and dealt with to the full extent of the law. Intellyx advises companies on their digital transformation initiatives and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. Image credit: Daniel Friedberg, Antana.
